IMPORTANCE OF FINANCIAL KNOWLEDGE - PART 7

Many of you must have heard about ULIPs or Unit Linked Insurance Plan.  It is a Market-Linked Insurance Plan.  From the premium you pay, a small portion is used for Insurance and the rest is used to Invest in Equity or Debt Oriented Schemes.  In simple terms, it is a mix of Insurance and Investment Plan.  The amount paid as Premium is eligible for Tax exemption. 

 

Another term that keeps doing the rounds is the Endowment Plan.  It is also linked to the Market.  Endowment Plans offer a guaranteed benefit called the SUM ASSURED.   

 

Many Insurance Agents and Banks would highly recommend Investor to park some amount in such ULIPs and Endowment Plans.  They also offer option to switch between various Investment Schemes mid-way of the total tenure of the ULIPs.  These two are highly popular mode of Investments n India.  Mostly because of the Tax Benefits it offers in addition to the potential return.  Some of the Investors are the view that Insurance Premium is a useless expense and prefer to buy a Product that will give some return.  But the reality is they do not offer a sub-optimal combination of Insurance and Investment.   

 

The Objective of the Investment should be very clear.  Is the Investment made for Insurance or for Market Return?  These two cannot be mixed.  The Coverage you get under the ULIPs or Endowment Plans are very little.  The expenses hidden and otherwise has a significant impact on the total returns you might be able to generate.  As a middle-income and salaried person, you are better placed by going for a Term Plan plus Mutual Funds.  

 

The Coverage you get under a Term Plan is much higher for the premium you pay.  Insurance is always an expense and it should be treated that way.  One should not mix Insurance and Investment without understanding their requirement and objective.  Mixing the both will give less than moderate returns from Both.   

 

If one has financial dependents, it is better to keep the Insurance and Investments separate.  The first thing should be to do buy a Term Insurance Plan with an adequate Cover and Invest the rest of the Money in few diversified Equity Funds.  If you do not want to take a risk on the Equity Funds, then better to take a Term Insurance Plan and Invest the rest in Public Provident Fund (PPF).  It has a good chance of giving better returns than Endowment Plans.

 

For people in middle-income group priority should be to ensure safety to the family against all contingencies.  The next step for them is to plan for specific known expenses, like Weddings, Education, etc.  If after allocating funds in various Investment Categories as mentioned in the earlier issues, if one has some free cash available then it can be used for ULIPs or Endowment Plans.  Both these plans have advantage and disadvantage.  The ability of the Person who presents these plans to you will be a great influential factor.  Most of the Indians Invest in Insurance, ULIPs and Mutual Funds through known people in the neighbourhood.  This is a blessing a disguise as there is hope that this person who understand your requirement and suggest the right product.

 

Invest wisely and have your priorities right.  Financial Safety of the Family comes first than anything else. 

(The above article was written for publication in Nov. 2019 issue of PRINCE’S VOICE – A Community eMagazine)